Posts Tagged ‘Investment Properties’

More Good Ideas in Real Estate

The last time, I focused on some general ideas in real estate that I find to be important for home owners to know about to appreciate their home ownership goals fully. Today, I want to focus more on the residential investment side of things in all things real estate. There are many good ideas in this area as well and many of them end up making the investors some money! Again, please let me remind you that none of this is legal, tax or investment advice.

Real Estate Good Idea #1: Investment Real Estate

Yes, why not? Investment real estate in itself is one of the best ideas in real estate. Think about it: you buy a home, you get tenants to live in the home, they pay you rent, which in turn you pay the mortgage and other expenses with. You’re responsible for repairs, property taxes and insurance and eventually you hold the house until it appreciates or until you want to hand it over to your heirs. Not a bad idea overall.

Landlording is a serious business because you’re responsible for the condition of the home your tenants live in, but with a little care in screening tenants and taking care of the house, it can be hugely profitable, especially if you buy the property at the right time when home prices are low. That way, you can even manage to get enough of a rent payment to cover the mortgage and other expenses, something that is pretty tough to do in a state like California, where historically home prices are higher than rents.

Real Estate Good Idea #2: Cashflow

Most investors will tell you that is the only way to invest. If the rental home doesn’t bring you any money month after month that goes straight to your pocket (or bank account) after paying all expenses like the mortgage, the property tax, the home insurance, the utilities (city and county) and repairs, it’s not worth it. Buying a rental that you pay into month after month is called feeding the alligator (or crocodile, I can’t remember which!) because eventually they say it will eat you!

While this is a good idea and a pretty good gauge (not to mention an interesting picture!) I don’t know how realistic this might be in a place like California. There are states where cashflow is better from what I hear, but traditionally, appreciation is the reason investors buy homes in California. However, it is still a good measure of a rental home to ensure that you are not paying too much out of pocket to hold on to the property. The idea is to have most expenses taken care of with the rent payment so that you’re not eaten by the alligator. Or crocodile.

Real Estate Good Idea #3: Appreciation

This is a reiteration of the earlier point, but I had to mention it separately to draw attention to it. If I had a dollar for each time someone has walked into an Open House and said, We used to live in this neighborhood. If only we had kept our home as a rental. The prices right now are just crazy! We could have got so much more for it! Coulda, woulda, shoulda. Well, the real estate investors turn this around. They hold on to a home for as long as they can and then sell high.

If you buy low, hold the home as a rental, have the tenants pay the mortgage (even if you pay some smaller costs associated with the property like utilities) and then sell high, preferably after the mortgage is paid off, you reap some of the benefits of appreciating property values and in some instances these can be substantial.

Real Estate Good Idea #4: Depreciation

While you are looking forward to the investment property appreciating, you can also look forward to the property depreciating! Depreciation is a tax advantage landlords have. According to the IRS, different kinds of property held for investment purposes depreciates over a certain amount of years until it it worth nothing and so “depreciation” is a deduction you can claim on your income tax return for investment property that is owned by you. This also can be a substantial advantage financially and sometimes the only reason certain investors choose to buy real estate.

Real Estate Good Idea #5: 1031 Exchange

The problem, of course, arises when you have made a huge profit in real estate. Now the IRS wants you to pay taxes on it! It’s called capital gains. What can you do? For one, you could just pay the taxes and keep the rest of the money liquid for when you want it. Or you can do a 1031 exchange. 1031 – or Section 1031 – is simply the tax code which refers to this kind of an investment property exchange. Basically, a 1031 exchange involves selling your investment propert and buying a “like-kind” property of equal or higher value. If you do that, you can defer taxes on any profit you may have made.

There are many companies, usually sisters of title companies, that specialize in 1031 exchanges which you should contact before you sell or buy if you wish to do a 1031. There are very specific rules you must follow regarding dates and real estate values for a successful 1031 exchange. However, it is a great tool and many real estate investors use it to their advantage.

Here are then the basic good ideas about investing in real estate. As I write these, a few more come to mind and, no doubt, I will have another post soon about some more good ideas in real estate! Until then, feel free to let us know your own.

Sacramento Duplex Market

February was a fairly strong month for duplex sales in Sacramento County, with twenty-five units selling, as opposed to eighteen units last February and an average of 19 units selling each month over the previous years.  As will residential properties, duplex prices have fallen sharply over the past year.  The average sale price of a duplex in Sacramento County fell 27.3% from February to February:  from $348,420 last February to $231,000 this February.  During the same period, the median sale price fell by 33.7%, from $348,420 last February to $231,000 this February.

It’s a tough time to be a duplex seller, with the duplex inventory still high at 14.6 months.  Though the median sale price of a sold duplex in February was $231,000, the median list price of the 279 duplexes in inventory is $329,000.

What’s encouraging is that we’re seeing more and more properties that pencil out fairly well.  One duplex that’s listed now, for example, yields a positive cash flow of $48.00 per month assuming a 20% down, a 10% vacancy factor and a property manager — if you managed it yourself that number would be more like $198.00 per month.  Three years ago I’d be hard pressed to find a duplex in Sacramento County that provided any kind of cash flow.  Today I found this one after about five minutes of looking — and I’m sure there are others out there.

Admittedly, the cash flow numbers for the “middle of the market” may not be too impressive.  Nevertheless, there are bargains to be had, and I believe that as prices on some duplexes and other multi-unit properties continue to fall, sales in this category will pick up throughout 2008 and beyond.

One Man’s Price Decline is Another Man’s Cash Flow

So much of the heat (and not light) that’s shed on real estate market writing contains the implicit assumption that falling prices are bad.

Are falling prices bad? Well, they are if you have no choice but to sell now, and you owe more than you own.

Falling prices are also bad if you’re buying and your position is such that you’ll have to sell while prices are still falling.

For everyone else, falling prices are much less of a catastrophe than melting ice caps, because we’re likely to see the situation turn around in a relatively short term.

Falling prices are actually good if you want an investment 1) that you can afford and 2) that provides positive cash flow.

For the longest time, I didn’t see too many properties that penciled out positive in Sacramento County. Today I stubbed my toe on a condo that seemed offhand to pencil out so well that I threw some conservative numbers such as a 25% vacancy rate at it, and I still ended up $5 per month in the black.

There’s probably an improvement of $100 per month that one could make in the vacancy rate, and you can take out the $85 per month in management fees if you want to rent it out yourself. The other thing that’s conservative about this analysis is that this is based on the list price of the home. On the flip side one should inquire about utilities and factor in an estimate for maintenance.

Granted, five bucks is not a lot of money. But lots of folks who bought when it was “a good time” because prices were going up were happy enough to be upside down by hundreds of dollars. (Like the seller of this condo — which is now bank owned? Could be!)

Cash Flow Worksheet

Sacramento Duplex Market – A Serious Buyer’s Market

We haven’t looked at residential income properties in quite some time, but last time we did, we found that the market for residential income properties in Sacramento County was a lot slower than the market for single family homes and condos. Sure enough, that’s still the case today.

Let’s take the case of duplexes. This August, one third fewer duplexes sold than last year. (The numbers are twenty units for last year and sixteen for this year). The average duplex sold this August for $355,969, down 4.8% from last year’s average of $374,021. The median sale price dropped 11.9% during this time, from $392,500 last year to $345,750 this year.

We don’t have figures for square footages or REO information on duplexes, unfortunately, so we can’t talk about those. However, inventory and the expired to sold ratios are the twin smoking guns that point to a market that is every duplex seller’s nightmare. There are 418 units in inventory, which works out to 18.7 months of unsold inventory based on average sales of 22 units per month. However, if you take just August’s sales as a basis, you come up with 26 months of inventory. Either way you slice it, that’s a lot of unsold duplexes people are trying to move.

The expired to sold ratio also tells a story of listings just sitting there. Last August the expired to sold ratio was 204.2%, meaning that roughly two homes expired for every one sold. This year the ratio is 318.8% — fifty-one listings expired and 16 sold.

Contrast these numbers to August, 2005, when duplexes were emblematic of the hot seller’s market. In that month, 78 duplexes sold at an average of $436,694.